Suppose someone offers to pay you $1,000 in one year. Which of the following is/are correct? Select all that apply. If inflation goes up, the present value of that $1,000 would go down. O If your time preference goes up (i.e., you become more impatient), the present value of that $1,000 for you would go down O If interest rates go up, the present value of that $1,000 would also go up. O If uncertainty in the economy goes up, the present value of that $1,000 would also go up.
Suppose someone offers to pay you $1,000 in one year. Which of the following is/are correct? Select all that apply. If inflation goes up, the present value of that $1,000 would go down. O If your time preference goes up (i.e., you become more impatient), the present value of that $1,000 for you would go down O If interest rates go up, the present value of that $1,000 would also go up. O If uncertainty in the economy goes up, the present value of that $1,000 would also go up.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose someone offers to pay you $1,000 in one year. Which of the following is/are correct? Select all that apply.
O If inflation goes up, the present value of that $1,000 would go down.
O If your time preference goes up (i.e., you become more impatient), the present value of that $1,000 for you would
go
down.
If interest rates go up, the present value of that $1,000 would also go up.
O If uncertainty in the economy goes up, the present value of that $1,000 would also go up.
Expert Solution
Step 1
According to time value of money, money received today is worth more than the same amount of money receivable at a future date.
If someone offers to pay $1000 in one year, then the Future value=$1000.
1. If inflation goes up, the present value of that $1000 would go down.
This statement is correct. In an economy with high inflation, the purchasing power of the money received today is much more than the purchasing power of the same amount of money to be received at a future date. So, in case inflation rises, the present worth of $1000 would decline.
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